Squeeze Play at Robeco

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Pension funds don't like paying for brokerage research these days. And that has pushed firms like Robeco Investment Management to rethink the way in which they reward their brokers with commissions, according to Mark Kuzminskas, director of trading in Boston and New York for Robeco, a firm that manages $25 billion in equities.

"Clients are indirectly saying they don't want us to pay for Street research," Kuzminskas says. He says that's because discounted commissions-in the form of rebates that pension funds get refunded through commission recapture programs-are rising. Pension funds are either starting recapture programs or are increasing their level of recapture, he says. About 20 percent of Robeco's business is directed by clients to brokers who provide them with a rebate.

Pension funds are increasingly asking that Robeco avoid soft dollar services. It now has to do more with less. Even though its commissions have been flat year-over-year, there's less for Robeco to pay for brokerage services.

"We'd love to have the top level of service at all of the bulge-bracket firms, but we just can't afford it," he says. Kuzminskas compares his job of managing a brokerage budget to a general manager in pro sports who has to pay players under a salary cap.

"We have to pick and choose," he says, "and it's forced us to make some tough decisions." Continuing the sports analogy, he compared a bulge-bracket firm to an All-Pro football player, saying a team can only afford so many. A money manager has to mix up the remainder of its brokerage services between niche brokers (specialty players), as well as electronic trading platforms (lower round draft picks) that "do a great job, but you don't have to pay them a lot."

One of the tougher decisions of the last year, according to Kuzminskas, has been a reduction of its brokerage list. It's now down 40 percent to 60 brokers. This rationalization of brokers has coincided with a more responsive way to pay for brokerage. The time it takes for a broker to get paid has been reduced. Now, if a broker brings a good investment idea or access to the management of a publicly traded company, Robeco attempts to pay them in a "timely manner."

Previously, if valuable research information was received in February, for example, the vote to pay that broker would come mid-year. It was possible that the broker might not get paid until the fall. That's a lifetime today on Wall Street. Now, portfolio managers and analysts have more leeway. The six-month broker review meeting is no more. Beginning this year, the broker review meeting has merged into the firm's quarterly commission review meeting. "That's when we're having the dialogue of who we want to be on our team under this new cap' system," he says.

Throughout this process, the trick has been to keep commissions at a level high enough so that services from brokers do not suffer. That's important, for instance, when a trade requires broker capital, Kuzminskas says. The realities of managing a commission budget these days have not escaped Kuzminskas. "Not everyone is George Steinbrenner," he adds.